Consequences of Death of Partner
Even on death of a partner, the Business of the partnership firm may not come to an end, if other partners agree to continue to run the business of the firm, like retirement of a partner. In such case, the accounting treatment is almost similar like retirement of partner. In case of death of a partner, the firm would get the joint policy value (if any). The amount payable to partner is given to the legal heir.
Accounting treatment on death of partner
- On death of a partner, Assets and Liabilities have to be revalued and the resultant Profit or Loss has to be transferred to the Capital Accounts of all partners including the deceased partner in the old profit sharing ratio.
- Goodwill is also dealt in same manner like retirement.
- In the absence of agreement, the representatives of the deceased partner can receive, at their option, interest at the rate of 6% per annum or the share of profits earned for the amount due to the deceased partner.
- If the firm has undertaken the insurance policy severally on the life of each partner, the executor of deceased partner is entitled to get share out of the proceeds of the policy. Further, he is also entitled to a share out of the surrender values of the policies on the lives of other partners (only when the entire premium paid is charged to Profit & Loss A/c and the policy are not appearing in the Books).
- On death of partner, accounting entries to be passed for :
1. Share of Goodwill. 2. Share out of the proceeds of the Joint Life Insurance Policy. 3.Share of reserves and other undistributed profit. 4. Share in profit of the firm from beginning till the date of his death. 5. Interest on Capital from beginning till his death date.
- Capital Account of deceased partner will be charged with :
1. Drawings and interest thereon from beginning of the Accounting Year till the date of death. 2. Loss on Revaluation of Assets and Liabilities. 3. Loss in business from the beginning of the Accounting Year till the date of death.
Joint Life Policy
Joint Life Policy is an insurance policy undertaken on the lives of all the partners. The firm pays the premium and the amount of policy is payable to the firm on the death of a Partner or on the maturity of the policy (whichever is earlier). The LIC pays for the policy on death of any partner covered in the JLP and policy comes to an end (no premium is payable thereafter)
Surrender Value: Surrender Value is the amount which an insurance company is prepared to return to the policy holder if the policy is surrendered.
The accounting treatment for the premium paid and the Joint Life Policy may be i) Without taking surrender value into account. ii) Taking surrender value into account.
If Joint Life Policy appears in the Balance Sheet at surrender value, then the firm will gain on the death of a partner.
Joint Life Policy not shown in Books
Under this method, premiums paid are charged to Profit and Loss A/c. No Joint Life policy is opened in the books and nothing is shown in the Balance Sheet.
Accounting Entry when Joint Life Policy is not shown in Books
| Insurance Premium A/c Dr To Bank (On payment of premium) | Profit and Loss A/c Dr To Insurance Premium A/c (Amount of premium transferred to P/L A/c.) | Insurance Company/ Bank A/c Dr To All Partners’ Capital A/c (On amount received and distributed in their old profit sharing ratio ) |
Joint Life Policy shown in Books
Joint Life Policy Method
Partners Joint Life Policy Account is opened in the books. The premium is debited to Joint Life Policy Account as and when paid. At the end of each year, the book value of the policy is adjusted to its surrender value by transferring the difference between the premium paid and the increase in the surrender value to Profit and Loss Account. The policy appears in the Balance Sheet at its Surrender Value on the assets side.
Accounting Entry
| Joint Life Policy A/c Dr To Bank (On payment of premium) | Profit and Loss A/c Dr To Joint Life Policy A/c (Book value of policy with surrender value) | Insurance Company/ Bank A/c Dr To All Partners’ Capital A/c (On amount received and distributed in their old profit sharing ratio ) |
Joint Life Policy Reserve Method
A joint Life Policy Account is opened in the books, to which the premium are debited as and when paid. At the end of the year, an amount equal to annual premium is debited to Profit and Loss Appropriation Account and credited to Joint Life Policy Reserve Account. The book value of the policy is adjusted to its surrender value by a transfer from Joint Life Policy Reserve Account. The Joint Life Policy appears on the assets side of the Balance Sheet at surrender value and Joint Life Policy Reserve appears in the Balance Sheet, on the liabilities side.
Accounting Entry
| Joint Life Policy A/c. To Bank A/c. (On Payment of premium) | Profit and Loss A/c. To Joint Life Policy Reserve A/c. (Reserved created by amount of premium) |
| Joint Policy Reserve To Joint Life Policy A/c (difference between premium paid and surrender value). | Insurance Company/ Bank A/c To All Partners’ Capital A/c (On maturity of the policy) |
So, Joint Life Policy A/c and Joint Life Policy Reserve account will stand in the books at surrender value. On termination of policy, JLP Reserve account will be transferred to JLP account or it may be credited to partners’ capital accounts in profits sharing ratio.
Partners’ Joint Life Policy Accounting – Problems
Accounting entries for Partners’ Joint Life Policy
P, Q and R are in partnership sharing profits and losses at the ratio of 3:2:1. They took a Joint Life Policy of Rs.60,000 which is appearing in the Balance Sheet at Rs.6,000 the surrender value. Now, if P dies, the firm will receive Rs.60,000 from the insurance company.
Show the Journal entries
| Bank A/c Dr 60,000 To joint Life Policy A/c 60,000 (Policy value received from the insurance company on P’s death.) | Joint Life Policy A/c Dr 54,000 To P’s Capital A/c 27,000 To Q’s Capital A/c 18,000 To R’s Capital A/c 9,000 (Excess of Policy value of Rs.60,000 over surrender value of Rs.6,000 transferred to Partner’s Capital A/cs in profit sharing ratio. P: 54,000 x 3/6=27000, Q: 54,000 x 2/6=18000, R: 54,000 x 1/6=9000,) |
However, if Joint Life Policy does not appear in the Balance Sheet, then the 2nd entry would be as follows (Policy value would be credited by old sharing ratio 3:2:1):
Joint Life Policy A/c Dr 60,000
To P’s Capital A/c 30,000
To Q’s Capital A/c 20,000
To R’s Capital A/c 10,000
Payment of Deceased Partner’s Share
X, Y and Z are in partnership in XYZ ,sharing Profits and Losses at the ratio 5:3:2. X died on 15th May, 2016. The firm closes its books of account as on 31st December every year. So the executor of X is entitled for 5 ½ months profit. If X’s share is immediately paid off, then profit for 2015 can be taken as base for calculating 5 ½ th months profits in 2016. If XYZ earned Rs.1,20,000 in year 2015, then 5 ½ th months profit is (1,20,000 x 11/2)= Rs.55,000. X’s share comes to Rs.55,000 x (3/10)= Rs.27,500. Journal entry would be :
Profit and Loss Suspense A/c Dr 27500
To X’s Capital A/c. 27,500
(Share of X 5 ½ th months profit in 2016 transferred to his Capital Account on death.)
At the end of the year, the Profit and Loss Suspense A/c will be transferred to Profit and Loss A/c.
Payment of Deceased Partner’s Share
Accounting entries for Payment of Deceased Partner’s Share
X, Y and Z are partners in a firm sharing profits and losses in the ratio of 4:3:2 respectively. The Balance Sheet of XYZ on 31st December, 2015 was :
- Liabilities : Creditors -3000, Capital (X:15000, Y:12000, Z:10000). Total 40000
- Assets : Cash 2000, Debtors 10000, Stock 3000, X’s loan 5000, Freehold property 20000. Total 40000
X died on 1st January, 2016. Firm had a Joint Life Insurance Policy of Rs.18,000. Its money was realized on 1st February, 2016. Goodwill is to be valued at 2 year’s purchase of the average of last 3 year’s profit. The amount of capital and goodwill, etc., due to the deceased partner was paid on 1st March, 2016. Deficiency of cash was made good by taking loan from the bank. The profits for the last 3 years, 2013, 2014 and 2015 were Rs.7,000, Rs.9,000 and Rs.11,000 respectively. Prepare Capital Accounts of the partners and Balance Sheet of Y and Z after making payment to the executors of X.
Value of Goodwill: 3 years’ average profit = [7,000 + 9,000 + 11,000] /3=9000. So value of goodwill = 2×9000=18000
Calculation of Bank loan to be raised: [Amount to be paid to X’s executors (15,000 + 8,000 + 8,000 -5,000)] – [2000 (Opening Cash in hand) – 18000 ( Joint Life policy)] = 6000
When only deceased partner’s share of goodwill raised in the books
| 1 Feb 2016 Bank A/c Dr. 18000 To Joint Life Policy A/c 18000 (The JLP money realized on death of X.) | 1 Feb 2016 Joint Life Policy A/c Dr. 18000 To X’s Capital A/c 8000 To Y’s Capital A/c 6000 To Z’s Capital A/c 4000 (Joint Life Policy A/c transferred to Partners Capital A/c in old profit sharing ratio. X: 18,000 x 4/9=8000, Y: 18,000 x 3/9=6000, Z: 18,000 x 2/9=4000, ) |
| 1 Feb 2016 Goodwill A/c. Dr. 8000 To X’s Capital A/c. 8000 (Only the share of Goodwill of X (8000) raised in the books and transferred to his Capital A/c.) | 1 Mar 2016 X’s Capital A/c Dr 5000 To X’s Loan A/c. 5000 (X’s Loan A/c transferred to his Capital A/c.) |
Partners Capital Account
| Particulars | X | Y | Z | Particulars | X | Y | Z |
| Dr | Dr | Dr | Cr | Cr | Cr | ||
| To X’s Loan A/c | 5,000 | – | – | By Balance b/d | 15,000 | 12,000 | 10,000 |
| To X’s Executors A/c | 26,000 | – | – | By Joint Life Policy A/c | 8,000 | 6,000 | 4,000 |
| To Balance c/d | – | 18,000 | 14,000 | By Goodwill A/c | 8,000 | – | – |
| 31,000 | 18,000 | 14,000 | 31,000 | 18,000 | 14,000 |
Balance Sheet as on 1st March, 2016
| Liabilities | Rs. | Assets | Rs. |
| Creditors. | 3,000 | Goodwill | 8,000 |
| Bank Loan | 6,000 | Freehold Property | 20,000 |
| Partners’ Capital (Y:18000, Z: 14000) | 32,000 | Stock Sundry Debtors | 3,000 10,000 |
| 41,000 | 41,000 |
When Full value of goodwill raised in the books.
| 1 Feb 2016 Bank A/c Dr. 18000 To Joint Life Policy A/c 18000 (The JLP money realized on death of X.) | 1 Feb 2016 Joint Life Policy A/c Dr. 18000 To X’s Capital A/c 8000 To Y’s Capital A/c 6000 To Z’s Capital A/c 4000 (Joint Life Policy A/c transferred to Partners Capital A/c in old profit sharing ratio. X: 18,000 x 4/9=8000, Y: 18,000 x 3/9=6000, Z: 18,000 x 2/9=4000, ) |
| 1 Feb 2016 Goodwill A/c Dr. 18000 To X’s Capital A/c 8000 To Y’s Capital A/c 6000 To Z’s Capital A/c 4000 (Full value of Goodwill raised in the books and transferred to partners Capital A/c in old profit sharing ratio.) | 1 Mar 2016 X’s Capital A/c Dr 5000 To X’s Loan A/c. 5000 (X’s Loan A/c transferred to his Capital A/c.) |
Partners’ Capital Accounts
| Particulars | X | Y | Z | Particulars | X | Y | Z |
| Dr | Dr | Rs. | Rs. | Rs. | Rs. | ||
| To X’s Loan A/c | 5,000 | – | – | By Balance b/d | 15,000 | 12,000 | 10,000 |
| To X’s Executors A/c | 26,000 | – | – | By Joint Life Policy A/c | 8,000 | 6,000 | 4,000 |
| To Balance c/d | – | 24,000 | 18,000 | By Goodwill A/c | 8,000 | 6,000 | 4,000 |
| 31,000 | 24,000 | 18,000 | 31,000 | 24,000 | 18,000 |
Balance Sheet as on 1st March, 2016
| Liabilities | Rs. | Assets | Rs. |
| Creditors. | 3,000 | Goodwill | 18,000 |
| Bank Loan | 6,000 | Freehold Property | 20,000 |
| Partners’ Capital (Y:24000, Z: 18000) | 42,000 | Stock Sundry Debtors | 3,000 10,000 |
| 51,000 | 51,000 |
Payment of Deceased Partner’s Share – Problems
Accounting entries for Joint Policy on Partner’s Death
P and Q share profits in the ratio of 5:3. They took a Joint Life insurance policy of Rs.50,000 on Jan. 1, 2013 for 10 years and paid Premium @ Rs.5,000 per year. On March. 15, 2016, Q died but policy amount was received on April. 30, 2016. The surrender value of the policy was 2013 – Nil, 2014 – Rs.1,500, 2015 – Rs.3,000. Show journal entries and Joint Life Insurance Policy Account and Joint Life Insurance Policy Reserve Account.
Journal entries for 2013
| 1 Jan 2013 Joint Life Policy A/c Dr 5000 To Bank A/c 5000 (Insurance premium paid.) | 31 Dec 2013 Profit & Loss A/c Dr 5000 To Joint Life Policy Reserve A/c 5000 (Reserve created against premium.) | 31 Dec 2013 Joint Life Policy Reserve A/c Dr 5000 To Joint Life Policy A/c 5000 (The adjustment made.) |
Journal entries for 2014
| 1 Jan 2014 Joint Life Policy A/c Dr 5000 To Bank A/c 5000 (Insurance premium paid.) | 31 Dec 2014 Profit & Loss A/c Dr 5000 To Joint Life Policy Reserve A/c 5000 (Reserve created against premium.) | 31 Dec 2014 Joint Life Policy Reserve A/c Dr 3500 To Joint Life Policy A/c 3500 (Adjustment of excess of Joint Life policy over surrender value 5000-1500.) |
Journal entries for 2015
| 1 Jan 2015 Joint Life Policy A/c Dr 5000 To Bank A/c 5000 (Insurance premium paid.) | 31 Dec 2015 Profit & Loss A/c Dr 5000 To Joint Life Policy Reserve A/c 5000 (Reserve created against premium.) | 31 Dec 2015 Joint Life Policy Reserve A/c Dr 3500 To Joint Life Policy A/c 3500 (Adjustment of excess of Joint Life policy over surrender value 5000+1500-3000.) |
Journal entries for 2016
| 1 Jan 2016 Joint Life Policy A/c Dr 5000 Dr. To Bank A/c 5000 (Insurance premium paid.) | 30 Apr 2016 Bank A/c Dr. 50000 To Joint Life Policy A/c 50000 (Joint Life Policy amount received on death of Q) |
Computation of Joint Life policy sharing among partners : [{Insurance policy received (50000) + JIP Reserve (3000)} – {Op Bal of JLI policy (3000) + Prem paid for 2009 (5000))] =45000. To be shared in old sharing ratio -P:45000×5/8=28125, Q: 45000×3/8=16175
| 30 Apr 2016 Joint Life Policy Reserve A/c Dr 3000 Dr. To Joint Life Policy A/c 3000 (Balance of Joint Life Policy Reserve transferred to Joint Life Policy A/c.) | 30 Apr 2016 Joint Life Policy A/c Dr 45000 Dr. To P’s Capital A/c 28125 To Q’s Capital A/c 16175 (Closing Balance of Joint Life Policy A/c is transferred to Partners’ Capital A/c in their old sharing ratio.) |
Joint Life Insurance Policy Account
| Date | Particulars | Dr | Date | Particulars | Cr |
| 1.1.13 | To Bank A/c | 5,000 | 31.12.13 | By JLIP Reserve A/c | 5,000 |
| 1.1.14 | To Bank A/c | 5,000 | 31.12.14 | By JLIP Reserve A/c | 3,500 |
| 1.1.15 | To Bank A/c | 5,000 | 31.12.15 | By JLIP Reserve A/c | 3,500 |
| 1.1.16 | To Bank A/c | 5,000 | 30.4.16 | By Bank A/c (policy amt) | 50,000 |
| 30.4.16 | P’s Capital:28125 Q’s Capital:16875 | 45,000 | 30.4.16 | By JLIP Reserve A/c | 3,000 |
| 65,000 | 65,000 |
At the time of realization of Joint Life Policy on the death of Q, the JLIP Reserve A/c has been closed by transferring its closing balance to JLI Policy A/c for the purpose of distribution to the partners in their old profit sharing ratio.
